South Korean authorities are tightening oversight of
securities trading by foreign banks on concern that swings in
capital flows could disrupt financial markets. The FSS yesterday
pledged to beef up investigations of currency trading at global
banks’ local offices and impose penalties when they unfairly
collaborate with overseas branches on transactions.

The FSS, a privately funded agency that enforces rules set
by the government and polices financial institutions, found one
European investment bank illicitly let its regional headquarters
in Singapore trade financial investment products, said Kim, who
declined to identify the bank.

Royal Bank of Scotland Group Plc’s Seoul branch is the
bank, the English-language Korea Times reported today, citing an
unidentified industry official.

The FSS carried out a regular audit of RBS’s business in
Seoul and the company will fully cooperate with the regulator,
RBS said in an e-mailed response to Bloomberg, without
commenting further.

Market ‘Disorder’

HSBC amended its business procedures to bring them in line
with the FSS observation and the changes are in place, Chung Chi
Yang, a Seoul-based spokeswoman at HSBC, said by phone.

Soo Park, a Seoul-based spokeswoman for Credit Agricole,
declined to comment on the penalty.

“We’re increasing inspection of foreign banks’ branches
this year beyond scheduled regular inspections as we’re seeing
disorder in markets such as the issuance of kimchi bonds,”
Deputy Governor Kim said. “Foreign banks’ adjustments of their
Asian portfolios could impact on their Korean branches’
portfolios, which can increase volatility in the market.”

Kimchi bonds are foreign-currency securities sold in South
Korea. An increase in issuance of the bonds for local use was
blamed by the finance ministry for contributing to a rise in
short-term overseas debt and the won’s appreciation.

Won’s Gain

South Korea’s won gained more than 4 percent this year, the
second-best performer among the 10 most-traded Asian currencies
tracked by Bloomberg. Short-term debt from abroad jumped the
most in two-and-a-half years during the first quarter, rising by
$11.7 billion, central bank data show.

South Korea in May said it will tighten limits on the
amount of currency derivatives that banks can hold as it seeks
to curb sudden moves in capital flows and the won.

Local branches of overseas banks will be allowed to hold
currency derivative contracts equivalent to no more than 200
percent of equity capital, down from 250 percent, and the cap
for domestic banks will be reduced to 40 percent from 50
percent, the finance ministry said on May 19.